The $47 Trillion Opportunity In Real Estate

A jury opened up competition in real estate and one asymmetric opportunity emerged from the ruling.

Author

Travis Hoium
November 10, 2023

This article is a follow-up to the Zillow spotlight article. This article builds on the analysis and frameworks built in the following articles.

Last week, a jury ruled the National Association of Realtors (NAR) illegally had colluded to keep real estate fees high and blew a hole in the $47 trillion U.S. real estate market that’s controlled by realtors.

This opens up a massive opportunity for Zillow, but before we get there, we need some more background:

Under a N.A.R. rule, a home seller is required to pay commissions to the agent representing the buyer, which sellers claimed forced them to pay excessive fees to the agents. The home sellers said the brokerages collaborated with N.A.R. to enforce what is called the “cooperative compensation rule.”

But under the verdict, the sellers would no longer be required to pay their buyers’ agents, and agents would be free to set their own commission rates

What’s at stake here is who controls supply and who controls demand for real estate. And there are hundreds of billions of dollars per year at stake.

Controlling Supply vs Owning Demand

The current real estate market and its 6% broker fees are predicated on controlling the supply of real estate. Supply is controlled through the 540 multiple listing service, or MLS, in the U.S. and 35 in Canada. The two critical features of the MLS are:

  • The agreement to split commissions with buyers’ agents

  • MLS blocks non-NAR listing agents from listing homes and non-NAR members (agents and you and me) from seeing homes

The structure has given realtors control in the system and given buyers and sellers little choice.

If a buyer can’t find listings because they can’t even see them, it forces them to use an agent.

If sellers can’t find buyers without an agent then it forces sellers to use an agent.

The agents — through NAR rules — agree to split the commission so no one rocks the boat.

It makes sense that a seller’s agent makes a fee, but the lynchpin is the buyer’s agent. If they’re not needed or compete on lower fees, the status quo falls apart because they’re the ones who control demand. So, splitting the fee is staving off a more competitive fee structure.

What I didn’t emphasize enough in the Zillow spotlight is how the 2-sided market in housing (the MLS) is gated by the agent on both the buy and the sell side. You can’t access MLS as a buyer. You can’t list your home on the MLS as a seller. If you could see homes on MLS as a buyer, the market inherently becomes more open to competition.

MLS, the seller’s agent, and the buyer’s agent work hand in hand to make sure the ~6% fee stays intact.

Breaking the Status Quo

How does this change? We’re starting to see cracks now that more information is available on services like Zillow. If you’ve bought a home in the last decade, you probably did a lot of searching yourself — without the help of the buyer’s agent.

This information may have been provided by Zillow, which generates revenue by supplying customers to the buyer’s agent. Critically, Zillow is working with the point of end market demand, not the agent representing end market demand the way the MLS is.

I referenced Ben Thompson’s Aggregation Theory in the Zillow spotlight article because it sums up why controlling demand is the key point of leverage in a digital world. It’s why Google, Netflix, Amazon, and Facebook are some of the most valuable products in the tech world. They aggregate demand.

First, the Internet has made distribution (of digital goods) free, neutralizing the advantage that pre-Internet distributors leveraged to integrate with suppliers. Secondly, the Internet has made transaction costs zero, making it viable for a distributor to integrate forward with end users/consumers at scale.

This has fundamentally changed the plane of competition: no longer do distributors compete based upon exclusive supplier relationships, with consumers/users an afterthought. Instead, suppliers can be commoditized leaving consumers/users as a first order priority. By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.

In this case, the supplier isn’t the home or the home seller, it’s the seller’s agent and distribution is the buyer’s agent.

If the NAR loses control of demand and suddenly buyers have more options it opens up cracks. Home buyers could go on Zillow to find homes, request tours on their own, and make an offer without having an agent. The point of distribution now moves from the buyer’s agent to the discovery platform (Zillow).

Homeowners may even ask why they have an agent when they can just reach buyers directly (which they can today on Zillow and other platforms).

Enterprising buyer’s agents could start the avalanche. They could set a flat fee or share the existing fee with the home buyer if they do the leg work of finding the home, whether the home is on the MLS or for sale by the owner. The agent could become more of a logistics point person, lining up mortgage options, inspections, and closing documents.

In the real estate future, the point of value and centralization likely becomes the home discovery process. That’s the aggregator Thompson talks about above. And Zillow has a very clear lead in aggregating demand in housing.

Disruption Is Coming…Eventually

In hindsight, it was clear that Google would win search, Netflix would win streaming, and Facebook would win social media, building enormous businesses in the process. The telltale sign of winning these winner-take-all markets was the largest base of users with sellers (advertisers and content companies) clamoring to reach those users. This is why I use the Smiling Curve as a framework to find these market winners.

I think Zillow can do the same in housing, but it will take time.

It took a decade for those tech giants to go from clear leaders to the value they generate today. It may take two or three decades for Zillow to disrupt an industry that’s been entrenched for a century. This is the biggest purchase most people will make in their lives and using the same process your parents used is…comfortable. But in time, technology will win.

A jury has allowed the open market to start construction on a real estate disruptor that could upend the fees we accept today and move to a more efficient platform. Now, the hard work begins building that business model. I think Zillow has a huge head start over the competition.

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.

Reply

or to participate.